China's ICBC shares trade strongly on first day

ChrisOliver

HONG KONG (MarketWatch) -- Industrial & Commercial Bank of China came to the market, and investors went to the bank.

Shares in one of China's "big four" once state-owned banks advanced 15% in trading on the Hong Kong exchange on Friday, matching what the market had expected from the debut of the world's largest-ever initial public offering.

"It's pretty spectacular to be honest, I am amazed that it opened up 17-plus percent; I had thought we would see a 20% premium on the day, but not that big of a gain immediately," said Andrew Clarke, a sales trader with Societe Generale in Hong Kong.

ICBC's shares traded on the Shanghai Stock Exchange closed at 3.28 yuan (42 cents), up 5% from its initial offer price of 3.11 yuan. The share opened 10% higher at 3.44 yuan, but eased back as trading progressed.

In Hong Kong, ICBC (1398) shares were quoted at HK$3.61 at the open, 17.5% above the IPO pricing at HK$3.07 (40 cents), but scaled back to close at HK$3.52, posting a 15% gain on the day. Market watchers had expected ICBC shares traded in Hong Kong to appreciate 10% to 15% on the first day of trading. Also see Asia Markets.

Investment curbs cap Shanghai gains

"I think the situation in Hong Kong was a little bit better than the situation in China," said Ben Kwong, an analyst at KGI Securities in Hong Kong. "In China, the participants were mainly Chinese investors, but in Hong Kong trading was driven by international investors."

Institutions, limited to what they can invest in China's capital markets owing to regulations that prevent the free flow of capital, likely bypassed Shanghai to purchase ICBC shares in Hong Kong, Kwong said.

He said derivative-related buying in Hong Kong also drove demand for ICBC shares as issuers of related warrants entered the open market to purchase physical stock.

Of a total market turnover of HK$76 billion, ICBC-related trading accounted for 49%, or $37.5 billion.

"Such large turnover, to a certain extent, was due to derivative-linked trading," Kwong said. "This factor, along with institutional buying, helps to explain why there was a divergent share price performance between the two markets."

The Shanghai Stock Exchange does not have a covered-warrant market. Analysts say the lack of derivative-related buying to underpin ICBC's Shanghai-listed shares, known as A shares, is a long term negative for the mainland offering. Caps on foreign institutional investment will also limit fund flows and undermine share price performance.

"Equities in Hong Kong would have preferential characteristics in terms of liquidity and depth compared to those singularly listed on the mainland," said Glenn Maguire, chief economist Asia-Pacific for Societe Generale in Hong Kong.

Offering stole the spotlight as world's tops

ICBC raised a total of $19.1 billion through a simultaneous listing on the Hong Kong and Shanghai stock exchanges last week to become the world's largest-ever IPO.

Beijing-based ICBC, one of China's "big four" state-owned banks, raised $5.1 billion by listing 13 billion A shares in Shanghai and $13.9 billion by listing 35.38 billion H shares in Hong Kong. The shares were priced at the top end of their offered range set by the underwriter.

The previous record for an IPO was the $18.4 billion listing of Japan's NTT Mobile Communications in 1998.

ICBC was established in 1984 when the People's Bank of China separated its commercial lending and deposit-taking operations to focus solely on central banking. It has 18,000 branches, 360,000 employees and more than 150 million customers.

If ICBC, China's biggest lender by assets, elects to exercise an over allotment option, the deal could increase by 15% to $21.7 billion and account for 16.7% of the bank's total share capital. Analysts say the bank is almost certain to exercise follow-on placements, given the overwhelming interests from retail and institutional investors.

Interest in the offering reached a frenzied pitch in Hong Kong last week, with retail investors forming long lines at the territory's big banks for copies of ICBC's prospectus in what was widely viewed as the hottest IPO in years.

The IPO has also led to a bonanza for U.S. banks involved in the deal, which took the majority of the related investment-banking fees. See full story.

Among previous Chinese banks to go public, China Merchants Bank Co. (3968) topped the charts in terms of first-day trading performance, gaining 25% on its Sept. 22 debut, according to Thomson Financial. Bank of China Ltd. (3988) rose 15.3% on its June 1 debut, followed shares Bank of Communications Co.(3328), which rose 13% on their first day of trading in June 2005.

"Even though it is a large-capitalization stock, demand is expected to be quite strong as many funds will try to pick up shares of ICBC because it will eventually be included in the major indexes," said Y.C. Chan, a fund manager at Philip Asset Management in Hong Kong.

The offering attracted more than $500 billion in orders worldwide. The retail portion was 78 times oversubscribed in Hong Kong and 49 times oversubscribed in Shanghai. Owing to the heavy interest, the retail portion of the IPO was increased to 10% from 5% of the total share offering under a so-called claw-back option.

The institutional portion of the Hong Kong offering attracted more than $350 billion in orders, exceeding available shares by 50 times. The institutional portion of the Shanghai offer was 14 times oversubscribed.

ICBC eclipses the Bank of China's $11.2 billion listing in May as the largest by a Chinese company.

ICBC was valued at 2.23 times 2006 earnings, roughly in line with valuations set by China Construction Bank Corp. (939) and Bank of China, which were in the first wave of China's big four banks to list shares.

In May, Goldman Sachs
GS, +0.07%
American Express Company
AXP, -0.21%
and Allianz AG Capital paid a combined $3.78 billion for an 8.45% stake in the bank.

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